Good News and Bad News for Stocks: The Global Economy Is Reviving

For anyone concerned about whether the U.S. stock market can keep racking up big gains from puny growth, the good news is that the global economy finally is revving up.

Alas, the bad news may also be that the global economy finally is revving up.

Already, the Standard & Poor's 500 has levitated 24% this year, which lets us turn up our expertly exfoliated noses at gains of just 12% for the MSCI World Ex-US Index, 15% for the Stoxx Europe 600, and a 1% loss in emerging markets. But global growth is picking up from 2.7% year-over-year in the second quarter to a projected 3.75% by late next year -- not exactly Bugatti-like acceleration, but still the first conspicuous expansion in three years. Will that lure investors from U.S. stocks in 2014?

Make no mistake: Better global growth will be welcomed by U.S. companies that have cut costs and maximized profit margins, already straining record highs near 9%. Borrowing costs are starting to rise and the job market is healing enough to stir wages, and companies desperately need revenue expansion to take over some of the heavy lifting in propping up profits.

Yet U.S. stocks shine brightest when global growth struggles. Weakness abroad often turns America into Miss Congeniality on the world stage, her reputation for corporate flexibility and policy pliancy second to none. In the U.S., "it's relatively easy to lay off workers in a downturn, while monetary and fiscal policy tend to be very proactive relative to that in Europe or Japan," writes Andrew Garthwaite, Credit Suisse's London-based global strategist. As a result, U.S. profits swing in a smaller range. During the most recent recession, per-share earnings here fell 35% before rebounding 85%; in Japan, they skidded 70% and then tripled. But that's also why U.S. stocks tend to lag during global booms. Between 2003 and 2007, U.S. stocks almost doubled, but trailed gains of about 140% in Japan, 125% in Europe, and nearly 400% in emerging markets.

THE IRONY ISN'T LOST on global investors. Like social media, reality TV, and aspartame, promiscuous monetary policy is an addictive worldwide phenomenon we pioneered -- and global growth is finally picking up because foreign central banks are now printing money with American zeal. These days, Japan is minting enough yen to lift the once-limp Nikkei, and the European Central Bank's commitment to do whatever it takes finally dragged Europe from its longest post-war recession. And what thanks do we get for leading the way? We get competition for our shares.

Our rehabilitated rivals aside, it doesn't helped that adulation for U.S. stocks is becoming feverish and unanimous. In the latest Barron's big-money poll, 89% of money managers say they're bullish about large-cap U.S. stocks, more than any other asset on the planet. U.S. nonfinancial stocks now command a 45% premium to their global peers on a price-to-book basis, the richest in 12 years and well above the historical 30% premium, notes Credit Suisse. Abetted by our central bank, we've wrung maximum stock gains from minimum growth: Our stock market value is now 112% our gross domestic product, which is higher than 96% of readings since World War II. It also towers over ratios of 44% in Germany, 41% in China and 62% in Japan.

Meanwhile, the bevy of "Buy" recommendations among Wall Street analysts on the U.S. relative to global stocks is at a decade high. "While margins typically peak only when labor gets pricing power -- with wage growth of around 3.5%, compared to 1.5% now -- this nonetheless means that in the medium term, margin risk in the U.S. is higher than for other equity markets," writes Garthwaite. The firm's strategists are cautious about emerging markets -- given their commodity exposure and tight labor markets -- but think Europe's rebound can run further, and are overweight Japan. They expect the U.S.'s sharp outperformance over the past three years to wane as global growth accelerates.

AN END TO U.S. OUTPERFORMANCE doesn't mean an end to our rally, especially if faltering bond returns continue to steer investors into stocks. Last week, data showed U.S. manufacturing humming along, and business investment still has room to grow. Rising wages eat into U.S. margins, but they also boost consumer spending. "Corporations are well-positioned to handle higher rates," notes Joseph Tanious, JPMorgan Funds' global market strategist, and "companies have the earnings power to cover the additional cost of servicing their debt." Earnings before interest and taxes recently reached 7.1 times companies' net interest payments, safely above the 20-year average near 3.7 times.

But a test for our outsize swagger could come soon. The consensus doesn't expect the Federal Reserve to begin scaling back its bond-buying stimulus until March at the earliest, but there's no reason why a very happy holiday -- with spending fueled by cheaper gasoline and momentarily-tame interest rates -- won't start to spur taper talk.

The late-January Fed meeting also marks the last powwow before Ben Bernanke retires and Janet Yellen takes over as Fed chairman. Mapping out a path from Crazy Town back to normal might make a nice -- and responsible -- parting gift. After all, a gentleman always opens the door for the lady behind him, so she wouldn't have to huff and puff so.

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